DUBAI - Gulf states should abandon their currency pegs to the U.S. dollar, allowing them to take control of monetary policy at a time of uncertainty over the U.S. economic recovery, the head of the world’s largest currency hedge fund said on Monday.John Taylor, chairman of New York-based FX Concepts, said sticking to the peg would leave Gulf states vulnerable to economic weakness in the U.S., where unemployment continues to rise.
“I don’t think it (the dollar peg) is wise,” Taylor told a conference in Dubai, adding that the Gulf “should be able to drive their own boat in the rough seas”.
All Gulf states bar Kuwait fix their currency exchange rates to the greenback. The dollar peg forces them to track U.S. monetary policy in order to maintain the relative attractiveness of their currencies.
U.S. interest rates currently stand a 0.25 percent and Federal Reserve Chairman Ben Bernanke has indicated rates will a have to stay low for some time to come to counter a weak job market.
Low interest rates suit Gulf states at the moment as they look to revive their economies, but as growth returns they will want to raise rates in order to ward off inflation.
Taylor said Gulf countries should float their currencies, which would give them a “tremendous amount of (policy) freedom”.
A decline in the value of the dollar and recovery in oil prices in recent months has revived debate over the dollar peg, as has the impending creation of a Gulf monetary union and single currency.
The IMF said last week the dollar peg provided a credible anchor and contributed to macroeconomic stability in the region, but others have called on states to ditch the peg.
The peg became a huge issue in 2008 when record oil prices saw the greenback plunge, driving up inflation to record highs across the Gulf as the cost of goods imported goods soared.
Gulf states have yet to decide whether to peg the single currency to the dollar, but several officials have questioned whether it is necessary.
Taylor said the single currency “will be a wonderful thing. I think these economies have a lot of similarities.”